3/15/2005 @ 2:30PM

Bernie Ebbers Guilty

Bernard
Ebbers
Bernard Ebbers
, the former chief executive of
WorldCom
and perhaps the most powerful American businessman ever to face a criminal trial, was found guilty today of securities fraud, conspiracy and filing false documents with regulators.

In the courtroom, Ebbers was red-faced and slightly teary-eyed as he hugged his wife, Kristie, and his stepdaughter. He did not speak to reporters. After the verdict was read, he slowly took time to put on his coat before leaving the court and spoke only briefly with his lawyers.

Ebbers’ lead attorney,
Reid
Weingarten
Reid Weingarten
, expressed disappointment in the verdict, saying, “We continue to believe there is not one chance in the world that he participated in any efforts to cook the books at WorldCom.”

Weingarten said there will be an appeal and specifically noted that the government’s refusal to immunize three key witnesses deprived the defense of critical testimony at the trial. They included former WorldCom Chief Operating Officer
Ronald
Beaumont
Ronald Beaumont
. Weingarten said all three were much closer to the accounting and were much more sophisticated than Ebbers was. Those witnesses, Weingarten said, would have exculpated Ebbers.

“This argument historically has not worked well,” says G. Jack Chin, a law professor at the University of Arizona. Most courts have concluded that it is up to the prosecutors to decide who to prosecute and who not to prosecute. If a witness decides to take the Fifth and not testify at a criminal trial, he can do so even if that means another defendant will be deprived of his testimony, Chin says.

As to Ebbers’ decision to take the stand, Weingarten said, “It was an easy call to put him up, and I thought he did fine.”

The likely sentence is somewhat indeterminate at this point. Sentencing guidelines that had been in effect in federal courts could call for a sentence well in excess of ten years because sentences would be ratcheted up in accordance with a huge dollar loss in the crime involved. But the guidelines are no longer mandatory under a recent U.S. Supreme Court ruling, notes George Newhouse, a lawyer at Thelen Reid & Priest. Newhouse predicts a sentence for Ebbers of somewhere between five and ten years.

Ebbers was one of the founders of WorldCom, first known as LDDS, and was its CEO from 1985 until 2000. When the company’s shares were at their height, Ebbers was nearly a billionaire, though he held those shares until WorldCom filed for bankruptcy in July 2002, three months after he was forced to resign and one month after the fraud was uncovered. His company reemerged from bankruptcy as
MCI
and now faces competing takeover bids from
Verizon Communications
and
Qwest Communications International
.

Federal prosecutors made the case that Ebbers, 63, was motivated to commit fraud when the end to a wave of mergers and the beginning of a meltdown in the telecom industry put tremendous pressure on the company’s share price. Ebbers’ personal fortune was largely based on WorldCom shares, and he had borrowed nearly $400 million with those shares as collateral. As CEO, he was also the most empowered to guide the fraud, prosecutors said.

The jury agreed. And as all CEOs are able to push and pull levers of money and power, and all are under pressure, the conviction should resonate well beyond Manhattan’s Foley Square.

The direct evidence that Ebbers knew about the massive accounting fraud at WorldCom came from
Scott
Sullivan
Scott Sullivan
, WorldCom’s former chief financial officer, who managed the company’s accounts. Testifying against his former boss, Sullivan said he acted under Ebbers’ direction, noting that Ebbers intimidated him into committing fraud so the company would meet Wall Street’s expectations.

“Who had the most to lose if the truth came out? Who had the power?” Assistant U.S. Attorney
William
Johnson
William Johnson
asked in his closing argument. Johnson emphasized that Ebbers had gone deeply into debt as early as 2000, pledging all of his shares as collateral just as the wheels started coming off for WorldCom. After more than a decade of growth through acquisition, its attempt to merge with
Sprint
was thwarted by regulators. This meant that WorldCom, for the first time, had to show growth through operations. But operational revenue was slowing at the same time as the Internet and telecom booms had both stalled.

Despite the fraud, WorldCom still had to reduce its guidance, and its share price was under $2 by the time Ebbers was forced out. The decline and the slowing of real growth in operational income led the company to start booking one-time, nonoperational items as revenue–items that WorldCom was unlikely to actually collect. WorldCom never told investors how its revenue mix had changed.

The fraud intensified over time as Sullivan, urged by Ebbers, started using increasingly aggressive accounting “adjustments” to meet investor expectations. The process intensified with more one-time items being selected to fill the gap between expected revenue and actual revenue. Later, the company began cutting reported expenses by capitalizing “line costs”–money WorldCom paid to other telephone companies to rent their lines–by treating them as capital expenditures rather than as ongoing expenses.

Normal “earnings management” slid into fraud. As operations worsened, the fraud increased. Ebbers didn’t get into the accounting details and testified he did not understand them, but he would reiterate to Sullivan the importance of “making the numbers.” This order made him responsible for the fraud and a criminal, the jury found.

In his testimony, Ebbers denied having conversations with Sullivan and said he didn’t even notice the dramatic changes in WorldCom’s finances, which were reported to him internally. Prosecutors said Ebbers lied on the stand, and the jury apparently agreed.

WorldCom overstated its results by more than $5 billion over seven quarters, prosecutors said, though by other measures the fraud totaled $11 billion. “A number that big a CEO knows everything about,” Johnson said in his closing argument. He emphasized the many reports that Ebbers received, and his famous attention to details, especially about costs. Ebbers famously decided to eliminate free coffee at WorldCom offices, saving $4 million, and had security guards fill watercoolers with tap water.

At trial, Ebbers admitted he paid attention to some costs but did not understand line costs, although that was the larger expense WorldCom faced. He was also forced to admit his involvement in the guidance process, which prosecutors alleged was central to the fraud.

Ebbers testified that his management style was that of a coach, heavy on delegation (he held that job as a young man). But the jury found that he knew what was happening on his watch.